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Episode 1531:
Nir Eyal examines why relying solely on the network effect isn’t enough to ensure long-term success for a product or service. He explores how habit formation and deeper engagement strategies can create lasting value, fostering a resilient user base that doesn't just grow but thrives.
Read along with the original article(s) here: https://www.nirandfar.com/2012/11/the-network-effect-isnt-good-enough.html
Quotes to ponder:
"Building a habit around your product is the real competitive edge not the network effect alone."
"Products that thrive leverage not just user acquisition but also retention through habits and engagement."
"The network effect may attract users, but habit formation keeps them coming back."
Episode references:
Hooked: How to Build Habit-Forming Products by Nir Eyal: https://www.amazon.com/Hooked-How-Build-Habit-Forming-Products/dp/1591847788
Contagious: How to Build Word of Mouth in the Digital Age by Jonah Berger: https://www.amazon.com/Contagious-Build-Word-Mouth-Digital/dp/1451686579
The Power of Habit by Charles Duhigg: https://www.amazon.com/Power-Habit-What-Life-Business/dp/081298160X
Learn more about your ad choices. Visit megaphone.fm/adchoices
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[00:00:30] This is Optimal Work Daily. The Network Effect Isn't Good Enough by Nir Eyal and Sanjit Paul Choudary with NirAndFar.com.
[00:00:41] If there is one altar at which Silicon Valley worships, it's the shrine of the holy network effect. Its mystical powers pluck loan startups from obscurity and elevate them to fame and fortune. The list of anointed ones includes nearly every technology success story of the past 15 years.
[00:01:00] Apple, Facebook, Microsoft, eBay, and PayPal have each soared to multi-billion dollar valuations on the supreme power of the network effect.
[00:01:09] But today the power of the network effect is fading, at least in its current incarnation.
[00:01:15] Traditionally defined as a system where each new user on the network increases the value of the service for all others,
[00:01:21] a network effect often creates a winner-takes-all dynamic, ordaining one dominant company above the rest.
[00:01:27] Moreover, these companies often wield monopoly-like powers over their industries.
[00:01:32] In the Beginning
[00:01:34] Once, all a company needed to do to leverage the network effect was facilitate communication between a critical number of customers.
[00:01:41] If enough people used a particular system to exchange information, a leader would emerge and become the de facto platform.
[00:01:47] Companies who could either form a marketplace or facilitate the flow of information between parties became tremendously powerful as central hubs of data transfer.
[00:01:56] In fact, the first network effect platform was Bell Telephone, which established a government-sanctioned monopoly nearly 100 years ago.
[00:02:04] Since then, successful network effects businesses have sung from essentially the same hymnal.
[00:02:09] First, establish a medium of communication by building the required infrastructure or inventing a new technology.
[00:02:16] For example, lay down telephone wires from coast to coast.
[00:02:19] Then provide access to the network to improve the ease of information transfer, say, by selling fax machines.
[00:02:26] Finally, race to grow the user base before competing services do.
[00:02:30] If you get bigger faster than your competitors, voila, you're inside the pearly gates.
[00:02:36] Race
[00:02:36] Rapture
[00:02:37] That's the plan, at least.
[00:02:39] But today, things are not quite so simple.
[00:02:41] For one, in the old days, consumers paid to access the network through their upfront investment in hardware.
[00:02:47] These upfront costs locked users into the network, and once they were in, they were in for good, thus erecting barriers to entry for would-be competitors.
[00:02:55] However, the cost of providing access to the network has fallen precipitously.
[00:03:00] The days of customers buying expensive hardware to use a network are gone, as is the correlating lock-in effect.
[00:03:07] Converts
[00:03:08] In addition to access costs falling to zero, another key component of what once kept users locked into a network has vanished.
[00:03:17] Once, porting contacts onto a new network, like switching instant messaging services from Yahoo to AIM, was a non-trivial task.
[00:03:25] Today, however, customers use their Facebook, Twitter, or Google profiles to join a new service in seconds.
[00:03:31] A burgeoning network, take Instagram or Pinterest, can leverage the single sign-on enabled by the social graph to reach critical mass faster than ever before.
[00:03:41] Users not only port their personal information, but bring their connections as well.
[00:03:45] In the age of the social web, the convenience of the social graph has largely toppled the lock-in that once kept users bound to one network over another.
[00:03:55] Tending the Flock
[00:03:56] Without the upfront investment in physical hardware and users' newfound ability to port personal information and contacts,
[00:04:03] how is a company to retain its users?
[00:04:05] Is the network effect's ability to lock-in users dead?
[00:04:09] Hardly.
[00:04:09] The power to leverage the network effect now resides in stored value.
[00:04:14] Unlike network access costs, stored value is investment that comes in small increments with repeated use,
[00:04:21] increasing the importance of the service the more a user engages with it.
[00:04:26] Stored value
[00:04:27] Stored value comes in four forms, and companies leverage these tiny investments to build lock-in to their service and retain users.
[00:04:36] Stored value comes in small numbers.
[00:04:37] 1. Creative content
[00:04:38] For instance, Pinterest, Facebook, or Instagram.
[00:04:42] Users invest in creating a portfolio of creative content which forms the basis of their interactions on the platform.
[00:04:48] The quality and quantity of the content results in more interactions with other users,
[00:04:53] which in turn provides greater value to the content creator.
[00:04:56] 2. Reputation
[00:05:28] For some minimum criteria set forth by the platform.
[00:05:31] Hence, once a service provider builds reputation on a platform,
[00:05:35] it prevents her from migrating to a competing platform.
[00:05:38] 3. Usage data
[00:05:41] Users store value in the form of data, either by actively collecting information,
[00:05:46] such as in the case of Dropbox or Reddit,
[00:05:48] or passively as their usage improves the service by offering more relevant information,
[00:05:53] such as is the case with Quora, which delivers a personalized news feed based on usage.
[00:05:58] The more a user consumes information through the platform,
[00:06:01] the more intelligent the algorithm becomes in recommending pertinent content to the user.
[00:06:06] In both cases, the data set built by or for the user delivers greater value with increased usage,
[00:06:12] something that won't directly be available on a competing platform.
[00:06:16] And 4. Influence
[00:06:18] For instance, Twitter or YouTube channel subscriptions.
[00:06:22] Networks that utilize a one-sided follow model create an influence dynamic.
[00:06:27] Unlike importing contacts or friending people,
[00:06:30] collecting followers is largely outside the direct control of the user.
[00:06:34] With the exception of sketchy tactics banned by the Twitter terms of service,
[00:06:39] accruing more Twitter followers can only be done by tweeting content others find interesting enough to share.
[00:06:44] As the user's follower count grows,
[00:06:46] so does the stored value in the network and the incentive to stay actively engaged.
[00:06:51] Keys to the Kingdom
[00:06:53] Creating a network effect is not what it used to be.
[00:06:56] Today, stored value created by the users reinforces the power of the network effect to retain users and grow market share.
[00:07:04] This dynamic makes creating user habits all the more important,
[00:07:07] as investments of stored value only occur through successive passes through the user experience.
[00:07:13] With the portability of the social graph and the fall of upfront costs to join a network,
[00:07:19] companies must leverage new ways of acquiring and retaining users,
[00:07:22] rather than just the network effect.
[00:07:24] Business models that leverage a network effect plus stored value hold the keys to the kingdom.
[00:07:33] You just listened to the post titled,
[00:07:36] The Network Effect Isn't Good Enough,
[00:07:38] by Nir Eyal and Sanjit Paul Chaudhry with NirandFar.com.
[00:07:43] And thank you to Nir for giving us permission to narrate his work on our shows.
[00:07:47] His name and site are both spelled N-I-R, by the way.
[00:07:51] And the post today was co-authored with Sanjit, who analyzes business models for network businesses.
[00:07:58] His work on platforms has been selected by Harvard Business Review as one of the top 10 management ideas globally for 2016 to 2017.
[00:08:07] Sanjit is the co-chair of the MIT Platform Strategy Summit at the MIT Media Labs and is a frequent keynote speaker.
[00:08:15] And you can find him online at platformthinkinglabs.com.
[00:08:18] There is a blog there, along with his bio and a lot more.
[00:08:22] And as for Nir, you can get a download of his bonus 80-page workbook full of exercises and activities to help you become indistractable.
[00:08:31] And that is also the name of his book that's worth checking out.
[00:08:34] It's all about controlling your attention and choosing your life.
[00:08:37] So for that, come by NirandFar.com.
[00:08:40] And again, Nir is spelled N-I-R.
[00:08:44] And that's going to do it for today.
[00:08:45] I thank you so much for being here and listening all the way through.
[00:08:48] And I will be back with you tomorrow for the Tuesday show, where your optimal life awaits.